Commodity curve purists insist that long-term futures prices must not be confused with market forecasts.
People who do that are deemed commodity dummies because long-term futures are said to reflect the price at which market participants are prepared to buy or sell commodities in the future today. That generally means prices that make sense for them right now, but not necessarily those they expect in the future.
As a result, certain assumptions can be made about curve structures.
If long-dated futures are very much higher than spot prices, the market is offering premiums to those who have the capacity to take delivery today and store the oil until the future. It’s a dynamic that indicates an abundance of oil in the spot market today, rather than an expectation that prices will be higher tomorrow. It’s known as a contango market and is generally a bearish signal. Read more
Take the end to the protest by oil workers in Kuwait:
Oil prices, both Brent and WTI, remain depressed:
Just a few developments to update oil watchers on. Plus one conspiracy theory.
First, John Kemp of Reuters observes on Thursday that gasoline demand is now at multi-year seasonal highs:
The parallels between the oil markets and bitcoin continue to astound.
Over in the bitcoin universe, for example, questions over the legitimacy of the $1,200 level achieved in November 2013 have begun to circle. The running theory is that the ridiculously high price was only achieved because Mt.Gox — Bitcoin’s premier exchange until it collapsed in February 2014 — was in league with manipulative HFT traders who, with the help of a proprietary algorithm nicknamed the “Willy Bot,” pumped the price as far as it could go, and then cashed out.
Over in the oil world, meanwhile, a similar dialogue is coming forth with regards to the record prices achieved in 2008. Read more
To be clear, I regret nothing. But here’s the real thing anyway, reasonably important stuff — what with prices in the eurozone falling for the first time in more than five years (do click to enlarge): Read more
You know, just because there was that one time the S&P hit $666:
Those looking to intensively scrutinise and analyse Opec’s non-cutting decision would do well to check out the public statement from the cartel which can be found here.
In any case, here is the key par to take note of (our emphasis): Read more
Some wise comments from our esteemed FT colleagues on Opec’s price war:
Cutting production only makes sense if there is strong reason to believe that the glut is temporary; and even then it makes better sense in low-cost fields, where not too much capital is tied up, than in high cost ones. Unless, of course, the oil price falls below the operating cost of a high cost field. That is thought to be about $7 a barrel in the North Sea. That is the economic reason why everything depends on Opec, which still controls much of the low-cost oil in world trade.
For the moment, most observers are betting that Opec is bluffing about a price war (which would in any case be the correct strategy) but this begs the question of maintaining internal discipline which is already frayed. Gulf peace and the addition of 2m barrels a day of Iranian supplies, could be the last straw.
Nigeria’s fiscal exposure to falling oil prices is amongst the most acute within the Opec group.
But as Standard Bank analysts note on Monday, whilst the country’s central bank has shown it is prepared to defend the currency ahead of all-important national elections in February, its ability to do so diminishes with every dollar that the Brent crude price loses:
The CBN is clearly struggling to balance constraining upside USD/NGN pressure with limiting the depletion of FX reserves. At present, the CBN is intervening in the interbank market just below the prevailing rate rather than protecting a line in the sand.
The CBN has also recently shifted the RDAS rate higher and we suspect may move it to the upper end of 155 +3% band in coming weeks.
Our core scenario remains that there will not be an official shift in the RDAS central rate until after the elections in Feb 15. The ability of the CBN to achieve such an outcome clearly diminishes, the lower the oil price goes.
Here’s a great chart from Emad Mostaque, a strategist at Ecstrat, a new research company set up by Mostaque and former head of EM strategy at Deutsche Bank John-Paul Smith:
When you look at things hard enough you realise almost everything in society can be reduced to a cartel, monopoly or perfect (and chaotically disruptive) competition model.
While cartels come in many shapes and forms, the purpose is common: stability.
In other words, as long as everyone plays by the rules of the cartel, what’s best for that particular participatory group can be guaranteed.
On which basis, government itself can be reduced to a cartel-type system. As can central banks. Read more
This little chart is becoming a major headache for the world’s biggest oil producers:
Russia geopolitical risk? Check. Middle East geopolitical risk? Check.
But commodity prices, and in particular oil prices, are doing nothing: Read more
The summer silly season is nearly upon us, so what chance a reprise of this Daily Mail classic?
From November 2009 when Britain’s tabloids met contango with predictable consequences: Read more
As we alluded to earlier, there is a battle taking place in the oil markets at the moment.
On one side there are conventional oil producers like Opec members desperate to stop oil prices from following the declining trajectory of the wider commodity complex. On the other side there are the new US shale oil producers, who — due to the US export ban — are unable to capture the full earnings potential of their production (on account of an inability to tap foreign bids directly).
The problem for Opec types is that the break-even rates they seek to defend are now too high to prevent the new class of producer from being incentivised to keep producing. This despite the fact that the export bottleneck only ends up transferring much of the profitability to the refining sector instead of the US producer. Read more
A picture, they say, is worth a thousand words. The same applies to some charts.
From the IEA’s latest market report on Wednesday:
The WTI-Brent spread is at a record wide of almost $20 per barrel. This isn’t, of course, what was supposed to happen.
As JBC Energy wrote on Thursday: Read more
Oil prices continue to decline, with WTI currently leading the charge:
The fixed income team at Credit Suisse have a good note talking about what’s really driving WTI backwardation. Small hint, they don’t think it’s much to do with Egypt.
They put the backwardation down to three things. Read more
A while back we talked about the anomaly of backwardated curves amid a veritable abundance of US and global inventory.
Or more specifically, the irony that prices were falling even as curves were implying backwardation (usually a bullish signal reflective of tight supply). Read more
Lots of commentary is linking the mini-surge in WTI overnight, and subsequent WTI-Brent compression, to events in Egypt.
But it’s probably much more related to a shift in interest-rate expectations than anything to do with Middle Eastern tensions. Read more
… and it’s all because, the lady loves shale oil.
Well, what we mean is that finally, the surplus stock of crude trapped in America is having a price effect beyond borders because logistical constraints have been removed and storage incentives have started to disappear. Also, because graphs like these can no longer be ignored.
The result: a major narrowing in the WTI-Brent spread. Read more
Home of oil sands, maple syrup, ice hockey, singing astronauts, William Shatner, the Bank of England’s governor-to-be and (rather poignantly) a lot of bears… Read more
John Kemp at Reuters has been following the interesting case of light sweet fatigue in the oil market.
As he first noted on Tuesday, a surge in shale oil production alongside a big increase in modern refinery capacity is increasingly undermining the value of sweet crude in the market. Read more
WTI crude prices are on the rise, but only at the expense of Brent’s premium. The spread between the two crude grades shrank below $8 this week, its lowest since January 2011.
But what’s really striking is the rise in US crude output, which has risen 57,000 barrels a day to 7.37m — its highest level since February 1992.
If one chart speaks a thousand words in this regard, it’s the following one from the American Enterprise Institute’s Carpe Diem’s blog, charting data from the US Department of Energy:
The number of cargoes that go towards determining the Dated Brent price is rising.
As Reuters reported on Thursday:
At least nine May cargoes have moved up the North Sea Forties crude programme after stronger-than-expected output from Britain’s Buzzard oilfield, the biggest contributor to the Forties stream.
According to the EIA, the definition of “spot market” is:
The price for a one-time open market transaction for immediate delivery of a specific quantity of product at a specific location where the commodity is purchased “on the spot” at current market rates.
From Capital Economics on Friday:
At the time of writing (Friday afternoon in the UK), equity and commodity prices and government bond yields are all falling sharply. This appears to be in response to weaker-than-anticipated US data on retail sales and consumer confidence (discussed further below). If so, this is probably an overreaction, as the figures were hardly disastrous. The falls in the prices of riskier assets may also have been exaggerated by week-end position squaring after the Bank of Japan-inspired rally in the previous days.
Nonetheless, most of these moves are consistent with our long-held view that a disappointing global recovery will cause the equity market rally to run out of steam, the prices of industrial commodities to fall further (with Brent crude in particular heading back below $100) and 10-year US Treasury yields to dip to 1.5% or so by year-end. The pick-up in market volatility more generally is something that we had been anticipating too.